The Federal Government says it will cut Western Australia's share of GST revenue if it goes ahead with a plan to increase iron ore royalties.

The move is expected to cost the Commonwealth around $1.9 billion, but the Government says it will not impact on its ability to return the budget to surplus.

In yesterday's state budget, WA Treasurer Christian Porter said raising royalties was necessary because his state's GST revenue had been slashed.

Mr Porter says WA will increase the state royalty rate for iron ore from 5.6 per cent to 7.5 per cent over the next two years.

The cost to the mining companies will be passed on to the Federal Government, as it has told miners it would refund any future state royalty payments as part of the Mineral Resource Rent Tax.

Mr Porter acknowledged the move will open up the Commonwealth to a bill of almost $1.9 billion.

But the Federal Government says WA's plan will backfire as the state will likely end up losing more in GST revenue than it gains in additional royalties.

Federal Treasurer Wayne Swan says the Commonwealth Grants Commission, which distributes GST revenue, is likely to revise up WA's revenue-raising capacity which will mean it will allocate less to the state.

He also warns the royalty rise will make it much harder for the Federal Government to finance additional infrastructure projects funded by the new mining tax.

Federal Resources Minister Martin Ferguson says WA's move will not impact on the Commonwealth Government's ability to return a surplus budget in 2012-13.

"But it does clearly have a potential impact in terms of our capacity to actually spend on infrastructure in Western Australia," he said.

"The announcements on iron ore royalties have sent a very sound message to the independent grants commission that WA has a greater capacity to raise revenue.

"That will be factored in no doubt by the grants commission in future allocation of financial grants."

But Opposition Leader Tony Abbott says the Federal Government's budget surplus is under threat from the mining tax deal.

He told Channel Nine the public cannot trust the Government's budget forecasts.

"This is almost going to destroy the forecast surplus, and what it means is if another state - New South Wales or Queensland - raises royalties, the surplus would entirely go or alternatively, the war starts again with the mining companies," he said.

"State governments are perfectly entitled to increase the royalties. The system has worked well in the past. It will work well in the future, and the mining tax completely mucks it up."

No surprise

Mr Ferguson says WA has embarked on a short-term cash grab that may have a long-term negative impact on the state.

And he says the Federal Government remains committed to the mining tax.

"[The] most important message to the mining industry is that we've got to deal with them," he said.

"We are going to honour that deal. We'll credit the royalties."

Premier Colin Barnett says the Federal Government and mining companies have known of his government's plan for some time.

"This year, 2010-11, Western Australia got back 69 cents in the dollar out of the GST. By 2014-15 we will be getting 33 cents back in the dollar," he said.

"[The] simple truth is, money collected by the sale of minerals in the form of a royalty is a more reliable source of revenue to the State Government than the GST is."

Mr Porter says the state is not getting a fair return on mining royalty revenue.

"This change removes an anomaly and will deliver a fairer return to the West Australian community who ultimately are the owners of these resources," he said.

Queensland Treasurer Andrew Fraser says there will not be any changes to his state's royalty regime in next month's budget.

"We overhauled the royalties back in my first budget, when I removed a discount the coal companies were enjoying," he said.

"It was there for industrial development. I took the view the coal industry in our state had developed and they should pay their way.

"What the West Australian Treasurer has done is remove a similar discount."

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